I am writing an educational post today which will attempt to describe, in the simplest terms possible, Modern Monetary Theory (MMT) and its place in the current national conversation. I fully accept that rational thought will play absolutely no part in whatever agreement is ultimately reached in Washington, DC so that is not really at issue. This post will be neither political nor funny. I also feel obligated to provide this disclaimer. I am a member of the one percent. As a rabbit American of means, I live an exceedingly comfortable lifestyle which is seen to by my large staff. I have significant investments, including substantial holdings in carrot, kale and blueberry futures. Honestly, I couldn’t care less about the fiscal cliff because my every whim will be met regardless. I sense however, that not all of you are in a similar position. I know my staff thinks they have cause for concern. In terms of what lawmakers may decide to do, my staff is right. In terms of economics, they really are wrong. Allow me to explain.
In making my most critical, essential and earth-shattering point, I will try to be as subtle as I can.
The Federal deficit is not big ENOUGH.
There. I said it. Go back and read it again just in case you missed the emphatic nature of this statement. Got it? Oh, I see, not really. I suspected as much. Allow me to explain and to provide links to more experts on this subject than you will ever have time to read but really, really should because it is fascinating stuff. It is also important that I note here that MMT is politically neutral. It is not a proposal for fiscal policy. MMT is a description of the current monetary structure as it has been ever since the US went off the gold standard. That it is not widely understood is an understatement.
I attended the University at All-Bunny (SBUNY) and when I took macroeconomics the words “modern monetary theory” never crossed the lips of any of my professors. Later, as a grad bunny, I attended some evening lectures during which MMT was introduced but the theory was young and had not fully coalesced. I say this not because I think you care about where I first heard about MMT but because there is a reason you probably don’t know anything about it either. Either you, like me, matriculated prior to the advent of MMT or your professors, like virtually all those in the country, were not exposed to MMT during their training so they did not pass it on to you. Either way, MMT is only beginning to enter the general knowledge-base because it simply takes a while for new information to gain a footing especially in an area as staid as economics. Still, given the potentially society-changing negotiations going on in Washington right now, this seems a reasonable time to point out that no matter what they decide, they are likely to be wrong because, as anyone who has paid informed attention to the monetary crisis in Europe knows, austerity measures are a death knell for already stressed economies. Nation states that are locked into a fixed currency, like all those who participate in the Euro, have turned over the control of their economies to forces which have no interest in acting in the best interest of each individual country. But, and this is important, the United States is NOT in this position.
Fiat Currency
Once upon a time the US was the prime signatory to the Bretton Woods Monetary System wherein forty-four allied nations agreed to tie their currencies to the US dollar at a fixed rate. The US dollar was tied to gold. This acted, for a time, to stabilize world currency markets and pushed then much needed security throughout the system. Eventually though, because gold is a limited commodity, being tied to the gold standard began to seriously impinge upon the US economy so, in 1971 President Nixon, with the so-called “Nixon Shock”, took the US out of Bretton Woods and off the gold standard. This was a huge deal, bigger even than I can describe. The United States now had a pure, fiat currency (meaning that the currency does not, in itself, have intrinsic value) and that the US, as the issuer of said currency, had new and significantly increased power to make much broader discretionary decisions in terms of economic policy. But a funny thing happened. US monetary policy makers didn’t really do much with their new found freedom.
To begin to explain this I must first make something very, Very, VERY clear – a US federal budget is nothing what-so-ever like your personal household or business budget in any way, shape or form. It’s not. See – you aren’t getting this.
It…is…not…like…your…family…budget.
Period. Do you see why? You don’t do you. *sad face* Well, you are in good company. Most of the country and, to the best of my knowledge, every single member of the House of Representatives, is right there with you. Here’s a hint. You have to work for your money. A business has to produce goods, or services, or, if it is Bain Capital a vulture capital firm, steal money in order to have any. The US government is an issuer of currency. They don’t have to earn it. They print it. (Do NOT go to the “inflation” place yet. I’ll get there later.) Let’s just stay focused on the simple fact that the big difference between the US government and you or me is that they will never run out of the currency needed to cover their debts. (I KNOW. I’ll get to the inflation thing later. Stay focused.)
One of the most interesting things about fiat currency is that taxes are not actually a requirement. Neither is there a need to sell bonds or borrow currency. Do you know what happens when you pay your bill to the IRS in cash? They shred it. No joke. They make a note in their computers next to your account and then that cash is gone. Poof. The only real purpose of taxes is to drive value into the economy (see Sectors, below). Taxes are a way to move value back from the private sector into the public sector. Deficits are the opposite. Deficits are a way to leave value in the private sector. For example:
if the Department of Defense spends $100 buying a wrench than the private company that sold it to them, let’s call this company Schmoing, gets that $100. The value has transferred from the public into the private sector. If Schmoing than turns around and pays their wrench supplier, ACE Hardware, $15 for the wrench, $15 of the value transferrs to ACE and $85 stays with Schmoing. If ACE than turns around and pays the actual maker of the wrench, a firm in China called Wrenches!, $5 for the wrench than $5 of the original $100 has now moved outside of the US economy. When tax time rolls around, Schmoing and ACE both pay taxes against the profit they made on the sale of the wrench. ACE pays $1 and …now here you know this is just imaginary because in the real world Schmoing would pay nothing…but back to the story, Schmoing pays $9. So, of the original $100, the government received $10 back in taxes and $5 went out internationally (to China) leaving an $85 federal deficit but that money didn’t evaporate. It is still here, in our economy, in the private sector, which is where we all agree we want to keep the majority of the assets of the country.
Sectors
Just as math is math, accounting is accounting. There must be balance in the balance sheet. Understanding that the balance is more macro than we commonly think is why it is so difficult for us to accept that a federal deficit is a good thing. The federal government isn’t balancing a federal budget – they are balancing an economy. These are very different things. If they were balancing a budget, like certain legislators keep insisting is a necessity, than the worry would be that income (taxes) and outgo (government spending) are balanced. This is way,WAY TOO SMALL A VIEW and it’s wrong.
Our economy is divided into three sectors and it is these sectors which need to be in balance. The three sectors are the private sector (individuals and business), the public sector (local, state and federal governments) and the non-domestic sector (foreign individuals and businesses, domestic monies which get moved into foreign tax shelters, and foreign governments). As always in accounting, one sector’s asset is another sector’s liability. This is seen in the example given above when the $90 liability of the public sector becomes the $85 asset of the private sector and the $5 asset of the non-domestic sector. MMT has, therefore, two rules: all sectors cannot be in surplus at the same time and all sectors cannot be in deficit at the same time. Accounting has these same rules. This is nothing new.
As we all know all too well, the private sector cannot last for long in deficit without the economic consequence of recession becoming apparent. Likewise, at least in the US economy, we are not going to be without a trade deficit any time soon. I’m pausing here so you can all stop on the tracks and pay attention to the gigantic epiphany train that is about to mow you down. Yes, people, if we don’t want the private sector to be in deficit and we can’t have the non-domestic sector in deficit than the only option is to have the public sector run a deficit. It’s a basic principle of accounting. It isn’t complicated.
It just isn’t what we have been taught. We have been taught to view the US budget as if it were separate of you and I, an independent entity which required internal balance. Instead, MMT proves that the public and private sectors are two of the three legs upon which this meta entity, the US economy, stands. So when you hear legislators scream about a deficit or you see a Tea Party protestor carrying a sign that says “Say NO to Socilism” on one side and “Don’t Mortage My Daugters’ Future” on the other side (after you get done laughing at the spelling) the response to this is simple – better you than me because you, meaning the US Treasury, can issue currency as you need it and I can’t.
So why are Italy and Greece in so much trouble with their deficits? That’s obvious. Neither country has control over its currency. Currency itself is, indeed, limited and has become, essentially, a commodity. In the overall European Union ecosystem, essentially, Germany has boomed at the cost of Greece and Italy. It’s that balancing thing again. Still, it’s easy to think of it this way. In the mid 1990’s, Italy had approximately X debt. They were not in crisis. They were a fully functioning economy and they paid their debts in Lira. Today, Italy also has X debt. Notice that this is the same amount. they are not any further in debt than they were but suddenly it is a debt crisis. Why? Well, it’s the Euro, of course. Italy is at the mercy of the Euro and there is no advantage to the Euro in favoring Italy so Italy is drowning under a bad debt they cannot pay with limited Euros.
What we want here in the US is what MMT theorists refer to as a good deficit. A good deficit is one which operates in an unconstrained way in terms of time and arbitrary limits. By contrast, fiscal austerity is deficit by design. Fiscal austerity directly impedes the growth of the private sector. New wealth is only created by the issuing monetary authority. Here, stand on this other train track while I explain this part. (Pay no attention to the giant locomotive that is moving in your direction.) I’ll return to the previous example.
Let’s say Schmoing sells that $85 wrench to Borthrop-Humman instead of the federal government. The value has passed from Borthrop-Humman to Schmoing but it remains in the private sector. It is not new wealth it’s just recycled. Even if Schmoing built the wrench from scratch, all the components were purchased from within the private sector and on the balance sheet the value still remains there. None of it is new.
BAM! *splat* *train wooshes by* Yeah, I know. I felt that way too. I always thought that because we built the thingie we were creating the wealth. My bad. I forgot that we may be building the thingie, the wrench in this case, but it has no monetary value. There is no money to pay for the wrench unless the issuing authority has issued said currency into the system and that can only be done by taking less out in taxes and/or pushing more in with government spending.
Professor Stephanie Kelton, Research Scholar at the Levy Economics Institute and one of the leading authorities on MMT has this to say,
So, let’s focus in on a specific period of time. The period in the late 1990s and early 2000s when for the first time in decades the US government ran budget surpluses…. Many people would inherently think that would be a good thing. It shows fiscal responsibility. Not only did they balance the budget, but they put it in surplus. Meanwhile, our current account deficits were huge. The rest of the world was running large positive balances against the US. That reduced US private-sector savings. Surpluses fell. It pushed the private sector into deficit on an unprecedented scale. The private sector went from surviving above the zero line to being pushed below zero. And the private sector remained there for a period of years, spending more than its income, borrowing to do it. And it was all fueled by a massive bubble economy that ended in recession, which drove the public sector’s balance back into deficit where it belongs.
When an economy is already in recession what it needs most desperately is new wealth and, with a fiat currency, that can only come from the issuing authority.
Inflation, Currency Exchange Rates and Unemployment
When was the last time your foot hat the flu? That’s because the flu is systemic. When one part of your body has it, your whole body has it. When an economy is in recession, it is systemic. Everything is effected. It is a meta problem. The odd thing about the US is that we have made choices to try to resolve our crisis without using the single most powerful weapon we have at our disposal. With any fiat currency there are only three things to watch for and none of them are deficit spending. The three economic delimiters are inflation, exchange rates and unemployment. As you can see, these things relate, directly, to each of the sectors.
In the past, deficit hawks and doves alike have tried to assail MMT theorists with the inflation argument. Just within the last three years some of the biggest names in economics, including some of the leading economic advisors to the US Department of Treasury and the Fed, have come to realize what MMT theorists have long known. If you are the issuer of the currency, you do not have to be at the mercy of bond vigilantes. As I said many paragraphs back, the US does not need to sell bonds or borrow currency in order to spend. These are habits and levers we employ as part of fiscal policy but they are not a necessity in terms of financing expenditures. It is interesting to know that the Secretary of the Treasury can order to be struck the currency of his choosing and deposit it in the federal accounts. Just like that. Congress would melt down in a fit of apoplexy, but it would be legal. The money gets injected into the economy and people go back to work. In fact, it would be easy and fast to open up the spigot and return the economy to “full” employment (approximately 3.7% unemployment) within the next two or three years at the most. An economy only gets inflationary, too hot, if new wealth continues to be pumped into the economy after the employment goal is achieved. Up until that time, provided there are no exigent commodity constraints, the supply remains in excess of the demand so inflation does not become a factor.
Again, from Professor Kelton,
Cash registers don’t discriminate. When you spend money in the economy there isn’t someone on the other end saying, ‘will that be public or private today?’ A dollar spent is a dollar spent. The federal government could SAFELY lower taxes, increase government spending, allow aggregate demand to increase.
Inflation is when demand outstrips supply. In the 1970’s this was because there was a sudden commodity shortage. The supply of oil was choked down to a trickle by the newly formed OPEC. Every product that used petrochemicals was effected. Trucks used to transport food needed expensive gas to get cheap lettuce transported across the country. The price of carrots went through the roof. Americans, with their huge gas-guzzling cars, waited in lines for gasoline. The economy could not take the shock. Unemployment rose at the same time prices spiked. Stag-flation was the new buzzword. This period is a classic example of what is called “demand-pull inflation.”
Money is not a commodity. It is not intrinsically limited. It is in no way comparable to oil (or gold). There is no reason that the US government should not be spending money to drive employment. The US dollar is not at risk of major devaluation and both short and long-term bond rates are at or just barely above zero. In other words, no one anywhere thinks the US economy is at risk of not being able to make its loan or bond payments. This is because all the investors, foreign and domestic, know that we are in full control of our currency. They are not at risk.
Final Thoughts
We have all become comfortable with viewing the federal budget just as we would view one small part of a much larger elephant. We each imagine that the “wall” or the “rope” that is in front of us is the whole thing. We each think it looks much like our personal budget only on a bigger scale. In fact, the meta whole is orders of magnitude larger and that entire pachyderm is sitting on a train that is, once again, headed right for you.
Over the next few weeks and months, the President and legislators from both Houses are going to be fighting over an imaginary “crisis” they have dubbed the fiscal cliff. This battle is entirely unnecessary. Our leadership is so used to thinking in terms of the gold standard that they still don’t know that a whole new age has dawned. The emphasis of MMT is in the power of the State to move within a substantially increased policy space which is largely unconstrained by monetary limitations.
For my part, I’ve told you about it. For your part, please pass this information on to your legislators and to anyone else you know. Post it on your Facebook page. Design a bumpersticker. Just don’t stay quiet.
I’ve digested quite a bit on MMT in recent weeks. I even read some of it before I ate it. A lot of what read really gets down into the weeds but some was quite accessible and can be found in the following places:
Professor Stephanie Kelton manages the New Economics Perspectives website and is on Twitter as deficitowl . The quotes above were from her excellent interview for Meidaroots. You can also download the truly fabulous podcast she did last week on The Majority Report with Sam Seder.
The Modern Monetary Theory Primer by Dr. L. Randall Wray is a bit weedy but essential for all those interested in MMT. This is the beginnings of what appears to be on its way to being a textbook.
Joseph Firestone who blogs on DailyKos as LetsGetItDone and at Corrente.com in their MMT blog does a commendable job of drawing all the big concepts together.
Very nicely done — now been linked at Mike Norman’s blog.
Demand never “outstrips” supply. A growing economy involves growing demand. Inflation is constant demand at advancing prices. Equating price adjustments necessitated by demand growth is 20th Century economists greatest failing. The effort to maintain stable “prices” in the face of unprecedented global growth has distorted dynamics of growth and sectoral balances.
You must not have had to stand in line with a gas can in the ’70’s. 😉 If you head on over to the Daily Kos, this is cors-posted there and there is a great discussion.
Been there, done that – was not funny! Real resource constraints can and will happen. Peak Oil and climate change can bring about such shortages
Sure, and I’m all about ALL of us getting on board the Wake The %^&*-up It’s Climate Change Express but the purpose of my blog post is limited. It’s an MMT primer for those currently paying attention to the crazy-making debate in the US right now. I’m only a physicist so I don’t pretend to be down in the weeds with this. Inflation will not be an issue with the US economy during the next two to four years and even if it started to heat up, there are a number of tools with which to address it.
I agree with you on the inflation. I was really responding to Arthur Carlson’s comment using your first sentence as a bridge.
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[…] [who is anyone] understands that over the long-term we have got to reduce the deficit [except not]- a deficit that was caused mainly by Wall Street greed, tax breaks for the rich, two wars, and a […]
Your response is a political one. I am not interested in politics (much) in this post. (I mean, who can resist the chance to make fun of the fact that the Tea Party just can NOT seem to spell-check its signage.) This post is, as it says right at the beginning, NOT POLITICAL. MMT is a description of the economic system as it exists. there are many options and tools embedded in it and those who really understand it deeply (I only scratch the surface) are well aware that some of the tools are in alignment with one political party and others would be favored by their competitors. But none of that has anything to do with this post. I am trying to get the word on MMT out farther into the community at large and, to that end, this post has been fabulously successful having already been seen and read by a couple of thousand people which, for a post on economics written in a comedic way (and by a rabbit), is wonderful.
Now, back to the detail of your comment. As I understand it, carrying a deficit in the public sector, really does not matter at all. Remember, it is nothing at all like the business I own budgeting a deficit and also that one side of the ledger MUST be carrying a deficit, because that is an absolute rule in accounting. As a physicist, I equate this to Newton’s third law of motion, for every action there is an equal and opposite reaction. But that’s just me. If what you really want is to bring down the US federal deficit than what you should be going after, the place you should be spending your energy, is in reducing the trade deficit. Pump energy and resources into supporting American manufacturing. If the Tea Party put as much energy into “Buy American” as they do into making signs, our economy would be in a stronger position today.
However, back to your original point, NO – READ ARLISS’ POST AGAIN. NO everyone does NOT understand that we need to reduce the deficit even over the long term. As is the rule of accounting and MMT, all sectors cannot simultaneously be positive. Since the private sector, essentially, MUST run in the positive and because we are not going to, realistically, be able to erase our trade deficit than that only leaves the public sector. The public sector MUST run a deficit. Debt is, of course, different but MMT and existing laws on the books address that as well and, remember, paying out that interest does serve the private sector and the non-domestic sector in a myriad of positive ways.
But finally, there is no excuse for what Wall Street did to this nation in terms of the creation of totally and entirely bogus financial instruments. People should absolutely, positively and without doubt be serving long jail sentences even as I type this. That they are not is a huge failing and I’m looking right at the Department of Justice when I say that. The entire cost of Iraq, both in dollars and in lives, is unforgivable and when the GOP talks about foisting debt onto their children, every dime we spent there is on their heads. Of course, being in Iraq took our attention off of Afghanistan and prolonged that war as well so that too falls on the GOP. Tax breaks for the rich have really boiled down to a political argument but as far as what MMT has to say, taxes aren’t a necessity at all so if we are going to tax the rich at a higher level than it is for reasons other than pure economics. It is a matter of policy.
The stagflation of the 70’s was NOT demand-pull inflation. It was a cost-push inflation due to the sharp rise in oil prices and the restricted supply. (I was getting my Econ degree at the time.) There has not been any true demand-pull inflation in this country in the past century, at least.
This post got cross-posted over to the Daily Kos and I was there much of yesterday during a lengthy discussion so I apologize for not responding sooner. I got a detailed explanation of cost-push inflation there and now understand that I was, indeed wrong. Thank you for catching it here as well. I will update the post. 🙂 My purpose in posting was that I could not find a really simple explanation of the basics of MMT on the web. As a physicist (and Arliss’ secretary, it’sa dual role) I was not really the best person to write it but I was excited about the theories and wanted to pass the information on to my friends. So I started reading, and reading, and reading. This post was the result and I an especially pleased that people did, indeed, see it and are taking their precious time to provide corrections. So, truly, thank you for your time.
Hi,
Thank you very much for this – these accessible summaries are sorely needed.
If i may add one recommendation to your suggested reading list – the Modern Money and Public Purpose seminar series at Columbia Law School – http://www.modernmoneyandpublicpurpose.com.
We have 4 more seminars next semester on a range of topics, and welcome comments and questions in person, online and in-between through the online forum.
Cheers,
R
Thank you! I will put the seminar series on my reading list. I’m on “7 Deadly Innocent Frauds” right now.
You did a fine job. Really a very good, well written review of the main points of MMT. I’m really glad to see more and more people getting on the bandwagon. Check out Mike Norman’s blog at mikenormaneconomics.blogspot.com. It’s a regular free-for-all of all things MMT. Clonal, Joe Firestone, and others comment there as well. We have at least one physicist who has educated us on the fact that the dollar zone is a closed system and the only external source of dollars is the federal government. Other metaphors include a bathtub with the faucet being gov’t spending and the drain being taxes. The rules of Monopoly are also instructive. If the banker runs out of money for the players, the instructions say to just cut up some paper and write the amounts on them as needed. 🙂
You didn’t mention Warren Mosler’s site: moslereconomics.com where you can find 7 Deadly Innocent Frauds and Soft Currency Economics. These two short books are part of his Mandatory Readings. Warren is one of the original developers of MMT.
I’m reading “7 Deadly Innocent Frauds” right now and plan to head on to “Soft Currency Economics” next. LetsGetItDone, aka Joe Firestone, was part of the looooonnnngggg discussion about this blog post over at the Daily Kos and was incredibly helpful.
It’s funny, because we all see the world through our own filters, one of the very first things I thought as I was starting to try to unravel MMT was, “Oh, this is a closed system. I can understand that!”
What has become more and more clear to me as I dive into MMT, is that other people I know and LOTS of other people in general around the country will really want to know about and understand at least the cursory concepts of MMT. Until I was reminded about it, listening to a podcast interview with Stephanie Kelton, I had forgotten it existed (and my previous exposure was long, long ago in one evening lecture at Stanford before the theory has really codified at all – I’m thinking this was in 1985 or ’86). It seems to me that MMT is REALLY IMPORTANT and that the professional MMT community needs to make a huge push to develop a simple, accessible narrative and then work to get on every talk show and cable news show known to mankind. I started to dive down because the podcast nipped my curiosity and the more I read the more I thought, OMG! THIS IS THE ANSWER. My next thought was, “how come no one in the media or legislative branch is talking about this?”
I blog as a rabbit because it is fun for me to talk about serious things through Arliss’ lens but one of the things I know is the be it physics or economics, all subjects like this seem too dry and uninteresting to the general public unless a narrative is developed which is relatable, short and, preferably, even a little funny. The attention span of the public is short but that doesn’t mean people don’t want to know. People are busy and they are buried under all the complexities of their own lives. The pros in the MMT world would not be wasting their time to come up with a series of one-pagers ALL saying the SAME thing but in different ways and then making a concerted effort to get these one-pagers out to everyone imaginable from local reporters to on-line science and political bloggers to all the television media that seems at all appropriate and, of course, to every single member of the legislative branch.
As you know, understanding MMT flips over the entire applecart when it comes to the fiscal policy debate. While I know that Pete Peterson and his like have their own reasons for driving the “crisis” and that their greed will be hard to push back against, I think a lot of legislators, on both side of the fence, would be relieved to have something REAL to push back with.
Nothing will change the immediate debate but this won’t be the only one that happens. It is the wont of scientists, of all stripes, to sit by and say, “I am a scientist, not a politician, I can’t get involved in that.” But the fact is that because scientists have not fought the good fight, the funding for basic science takes a hit in every budget. That we don’t get the word out is on us. At heart, politicians, like all animals, respond to the environment around them. Physicists are the perfect example of a field where we have done a terrible, terrible job of telling our story in such a way that the public understands the importance of research and therefore creates pressure on the politicians.
The MMT community COULD be telling their story well and the public COULD be pushing back against the Tea Party mentality and the neo-conservative agenda with a fact-based MMT narrative that is powerful. That isn’t happening, but it could….
wow! Arlissbunny you have just blown me away with this blog.
I always get excited about learning something new. I was so taken with what I learned about MMT that I proceeded to send the link to President Obama at the White House. I hope he gets to read it. i will let you know if I get a reply
Teach us more please. How about the same take on Physics? A difficult subject for me in school. Anyway it could use some bunny magic to explain it:)
Some advice: watch out for typos. You consistently have used than for then, it gets confusing:)
Thank you, and keep up the good work you do!
Best regards,
Danielle McPherson
Danielle – thank you so much! Your words are very kind. As a note, when I say “than” in a statement that begins with the word “if,” it is an “if/than” statement as in programming and math.
arlissbunny — With all due respect, I believe that the if/then construction is correct, even in programming and math. If a=b and b=c, “then” a=c. (I know, not necessarily, but still.) “Than” is usually used for comparative purposes such as “more than” or “less than”. You might check an old textbook. 😉
I am also very gratified to see that you are reaching other people like Danielle. We need as many people as possible to understand MMT. It is NOT rocket science.
Well, as it turns out, the old adage IS true. One does indeed learn something new every day. The last six days I’ve been starting to learn about MMT and today I learned I’ve been using a word incorrectly my entire life. I always thought “then” was associated with time and “than” was both consequence and comparison. Opps! Big props to Danielle for bringing it up and to John for bringing it up again.
But rocket science? NOW you’re talkin’. 😀
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Add Bill Mitchell to your reading list. http://bilbo.economicoutlook.net/blog/
Keep on hoppin’
Already done! Thanks for the recommend. I’m reading as fast as I can. It’s all fascinating to me.
Thanks for the update arlissbunny. I find it all fascinating too. Learning as fast as I can. Yikes, and I thought I knew Economics!
I have a question. Private + Public + Foreign = 0, right?
But the government can just print what it wants.
So if the Private = $100t
and Public = $-100t
(ignoring foreign ftm)
and the government prints $100t and puts it in its account, bringing it to $0
This is where I get confused. Is that newly printed $100t actually a $-100t even before it is spent? Does it somehow count against private and foreign bringing the total to 0? Since the government doesn’t actually hold currency (just creates and spends) , if it bought back bonds, paying off debt, how does that not put $ into the private sector while reducing the deficit?
Not arguing against, just trying to understand.
My apologies for this long delayed response. Holidays, visiting family and the end of year books for my manufacturing company have all impinged on my sanity/sleep/spare time. I understand your question and I THINK I could explain it but I am just a physicist who got interested in economics recently. The real pros live at places like Bill Mitchell’s Billy Blog and Stephanie Kelton’s New Economics Prospectives Blog. I really, REALLY recommend that you go there and ask the very same question. I don’t want to give an answer that would in any way be confusing or incorrect. If you can’t get an answer there, come back and I promise to do my best not to be too obtuse.
I have two objections to this line of thinking:
1. To my way of thinking, “deficit” is not “debt” – it’s approximately the first derivative of debt. As long as the deficit is positive, the debt grows. Do you distinguish between the two, or should I read your post as if the two were synonymous?
2. The debt cannot grow without bound – or can it? Can it grow to be a multiple of GDP?
Apologies. I have been busy with holiday, family and my human staff has been closing the books for her manufacturing company. This blog was cross-posted over to The Daily Kos and there was an excellent thread there which answers not only your question but provides a LOT more information as well. The new post today, “Mint the Coin vs the Debt Ceiling” is also cross-posted and most of the weedy discussion will probably be over at Kos. Here is the link for the cross-post for this blog post http://www.dailykos.com/story/2012/11/25/1164553/-Modern-Monetary-Theory-vs-the-Fiscal-Cliff. Again, apologies for not responding sooner.
[…] figured this whole thing out before. Part of this is because, as I have said, almost all of the people currently staffing those positions learned monetary policy at a time when […]
[…] eventually I found a way in and I buried myself in it for several days at the end of which I wrote, “Modern Monetary Theory vs the Fiscal Cliff.” And that is how IT all started. I continued to read and listen to MMT podcasts and YouTube posts […]